Friday, May 16, 2008

The Big Oil Scapegoat (The Enemy is Us)

Just about every high-schooler in America should be able to recite several reasons for high oil prices. We’ve heard the trope often enough.

• Increasing demand from China and India.

• Geopolitical unrest in places like Nigeria and Venezuela.

• Decline in dollar value against other currencies.

• OPEC cartel hostility to the U.S. and concomitant price-fixing or other monopolistic practices.

• Speculation in the commodities markets.

One is supposed to say “Big Oil Company Greed”, too, but that pejorative confuses the issue. Aren’t we all trying to make as much money as possible? We only pull out the term “greed” when we’re referring to the other guy. To describe our own acquisitiveness, we contrive different concepts: frugality, compensation, incentive, merit pay, financial rewards for meritorious service, and so on.

The “Big Oil” scapegoat is handy, though illusory. Big Oil (and other energy conglomerates) has stockholders and those stockholders expect you to make money. I don’t know how many people in America own oil company stocks but you can bet there are plenty. You can bet also that the complaints of high petrol prices are somewhat muted in the households of the millions of people who have little pieces of the “Big Oil” pie.

There’s a smart guy named James Stewart who writes a column for the Wall Street Journal and Smart Money magazine. All praise to Mr. Stewart for being so candid in describing (for the reader’s benefit) how the speculative process works. A recent column was titled “Old Oil Rules Don’t Work.” Stewart buys oil stocks outright but he also engages in the risky business of options trading. He’s representative of a lot of other smart people who bought into “Big Oil” and, with the rising prices, it was hard to lose money. For people like Mr. Stewart, the worry was not of losing money, but of earning more or less of it.

Stewart gives the example of selling options “calls” on oil and having to buy the calls back in order to keep the stock--which was trending significantly higher. That’s a process which, in Stewart’s calculation, incurred a minor loss for a larger gain.

Stewart acknowledges no particular genius in the trading of stocks, although it must be mentioned that successful options traders are a rather select group. Police officers, teachers, small business people, preachers, and postal workers, people from all walks of life, have bought into an profited from the activities of Big Oil. In some cases, the strongest critics of “Big Oil” are the unknowing beneficiaries of oil price increases through the investments of their pension funds.

It is impossible to know exactly to what degree speculation and investment fuels the price of oil, but it is safe to say it is a significant factor. It is also safe to say that “Big Oil” is not the only entity which profits from rising oil prices. In fact, it’s kind of provincial to beat one’s chest and prate about “Big Oil” when so many other factors are involved besides the churlish Obamaesque pejorative of “corporate greed.”